Have you ever heard about the term closing costs? It is the amount of money you need to pay once the house deal is done. In a house sale transaction, the buyer is mostly responsible for paying the closing costs. While buying the house, the buyer needs to consider that the advertised price is not what they’d finally pay. They will have to pay closing costs additionally. If the loan approval covers only the quoted price of the house, they will either have to negotiate on closing costs with the homebuyer or look for another property that falls in the range of the mortgage amount.
How much are the closing costs? This is one question that lingers in the minds of all home buyers. To estimate closing costs, you must first know what all expenses are included in closing costs.
Closing costs include all the fees associated with the purchase of any property. These expenses are made at the end of the purchase transaction. Closing costs are the final amount that you will spend to purchase your house. fees that are associated with any real estate purchase that occur and the end of the purchase. The closing of the transaction is when the title of the home is transferred from homeowner to homebuyer. This is also called shifting of ownership.
That the closing of the home is nearing, may be a scary thought for the buyer. This is because they are scared of the high fees right after paying a significant sum for the house. Knowing the closing of the home is coming may be intimidating for the home buyer. It is thus wise to understand when exactly the fees will have to be paid and what expenses are included. This will make the homebuyer more informed about the costs and eliminate the shock at the end. One thing to note is that there is no set value of closing cost for the buyer.
Below is the list of these fees and expenses. It is a vast list and not all expenses listed will be a part of closing costs for your house. All closing costs will include some of these.
- Application fee: This is the fee levied by the lender for processing your application for the mortgage. This fee will depend on the lender. Some lenders do not charge a fee at all. However, in addition to the processing fee, some lenders may want you to pay for them to check your credit report.
- Appraisal fee: This is one fee that will certainly be a part of your closing costs. It is the cost of assessing your house to ascertain its value. Many times, the appraisal fee is paid in cash earlier and in those cases doesn’t count as a part of closing costs. However, sometimes the lender pays it initially and later adds it to the closing costs.
- Closing or escrow fee: This is a common fee that is mostly included in the closing costs. It needs to be paid to the title company for switching the title.
- Lawyer fees: In some states, it is a mandate that this switching of title from homeowner to the homebuyer is done in the presence of a lawyer. If you live in one of those states, you need to pay the lawyer fees as well.
All the fees that we already talked about are those that home buyers need to pay to lenders or title company for transferring the title. Additionally, homebuyers also need to incur federal and insurance fees as they reach the end of escrow.
Escrow deposit: They also need to pay an escrow deposit to insure the property and mortgage. This deposit is a security reserve that the financial institution keeps for the home to cover for any unforeseen financial changes. This doesn’t apply to all transactions but is a possibility.
FHA upfront mortgage premium: This is the fee that you need to pay to the federal housing administration. You need to pay this if you have an FHA loan. It is 1.75% of the base loan amount. These fees may sometimes be added to the loan too.
Insurance costs: You may have to pay for multiple types of insurance as a part of the closing costs. These include:
- Homeowner’s insurance: This insurance covers the house against any possible damages. The home buyer needs to pay the premium for the first years as a part of closing costs.
- lender’s policy title insurance: This cover the lender in case there are any title mishaps. It ensures that all paperwork is complete and the lien against the property is valid with the home buyer as the owner of the house.
- private mortgage insurance: If the home buyer pays a down payment lower than 20% to get the loan, this insurance is applicable. The first-month charges will be added to the closing costs.
Your home is your dream, do not let closing costs deter you from following it. Your closing costs will come to about 2-5% of the purchase price. This is the average fee and will vary case wise. These costs vary for all home buyers and thus it is not possible to quote an exact amount that you will pay as closing costs. Recent surveys estimate these costs at an average of $3700. This cost is higher for homes that have been waiting to be sold for a while. However, the home buyer can negotiate with homeowners on these closing costs. Homeowners do accept such negotiations as they do not want the home to stay unsold for long. They thus pay a portion of the closing costs out of their profits.
Buying a home should spell joy for you. You can minimize the stress by getting guidance from your agent or financial institution about the closing costs. Once you are prepared about the costs and account for them in your budget, it will get easy to navigate through the entire process.